The S$48 billion Resilience Budget was unique in two aspects – it came just five weeks after the Feb 18 announcement of the Unity Budget 2020, and secondly, requires a draw on past reserves to fund it.
These are extraordinary measures in extraordinary times. But the COVID-19 pandemic has proven to be a black swan event of sorts, starting as a healthcare crisis but quickly morphing into an economic emergency as well, with many expecting this current downturn to be a bigger threat than the global financial crisis from a decade ago.
READ: Singapore's economy contracts by 2.2% in Q1 as COVID-19 outbreak hits construction, services sectors
MONETARY POLICY ACTION
Global growth forecasts have been slashed and now a global recession appears to be on the cards for 2020.
Major central banks around the world have taken aggressive monetary policy easing moves in recent weeks.
This includes the US Federal Reserve, which slashed interest rates to near zero in two emergency moves as well as embarked on quantitative easing, pumping money into the economy through the purchase of bonds, among other measures to inject US dollar liquidity, and buy commercial papers.
They were joined in lockstep by the European Central Bank (ECB), the Reserve Bank of New Zealand, among others.
The Monetary Authority of Singapore has also eased monetary policy settings by flattening the slope of the trade-weighted Singapore dollar nominal effective exchange rate (S$NEER) back in October 2019, with another easing to a zero appreciation slope announced on Mar 30.
In addition, the establishment of the US$60 billion swap line with the US Federal Reserve has calmed some market concerns about the ongoing US dollar funding squeeze. But the heavy lifting rightfully came from the fiscal front for Singapore.
With COVID-19 threatening the viability of many businesses and employment of Singaporeans, the attention has rightly turned to fiscal policy to head off a recession or at least buffer the downside growth risks.
The official 2020 growth forecast has been slashed to a contraction of between 1 per cent and 4 per cent year-on-year. Without the Government as the spender of last resort, the economic ramifications of the COVID-19 pandemic could potentially be even more severe and longer-lasting than the health crisis itself.
This is where the reassurances of the public sector taking the lead for creating jobs for 10,000 this year, helping employees stay employed through the enhanced wage offsets, particularly for COVID-19 impacted industries like aviation and tourism, new income support grants for displaced individuals and enhanced cash and Workfare pay-outs, would come in very timely and handy.
These interventions may prompt some to worry that a bigger Singapore Government may come with with negative connotations of extensive bureaucracy, intrusive policies and possibly inefficient involvement in the economic arena.
However, economic theory has always accepted the role of counter-cyclical fiscal policy – of government discretionary spending and changes in tax policy to counter an economic downturn.
ADDRESSING MORAL HAZARDS
With a bigger role played by the Government in the economy in this COVID-19 slowdown, some may wonder if businesses and households may start taking the ability and willingness of the Government to bail them out for granted.
However, this axiomatic moral hazard problem – where someone has the incentive to increase his exposure to risk because he does not bear the full cost of that risk – is less applicable at this juncture for two reasons.
First, Singapore is a small and open economy, vulnerable to economic global tides.
The incoming economic data points to a potentially deeper and more protracted slump than the SARS experience in 2003, especially given the rapidly escalating infections and fatalities globally, which have been accompanied by increasingly extreme measures of countries or cities imposing lockdowns and other restrictions.
The public sector’s involvement is crucial to help Singapore manage the risks and impact of this projected slump.
READ: Commentary: Budget 2020 shows old medicine can soothe symptoms but won’t be enough for businesses
Second, the proverbial rainy day is here. The reason for decades of fiscal prudence is to have the ammunition to respond urgently and aggressively in situations like this current COVID-19 pandemic.
Moreover, the current draw on reserves does not mean that the baby is being thrown out with the bath water. The golden rule about balancing the budget for each term of Government has been upheld, with the President’s approval sought for the draw on past reserves.
Judging by the previous experience of the last draw on past reserves back during the Global Financial Crisis, which saw the sum fully repaid in 2011, there is an established track record of fiscal discipline.
Looking ahead, some clarity must come in terms of the Resilience Budget announcements that will help the economy better appreciate the effects of public policy and anticipate the extent of the Government’s role.
For instance, will the 10,000 jobs created fall mainly in the public or private sector? What is the proportion of permanent or temporary employment, and if they will be in economically viable growth industries?
How are companies that have accepted support from the Resilience Budget shifting operations or rechannelling manpower? What are they doing to ride this storm out?
Providing some updates on how labour has been channelled to productive ends may go some way to allay fears of a “free lunch” at the Government’s expense.
This will also give Singaporeans the confidence the money from the Resilience Budget is well spent and reassure them that there is an efficient and caring public service that looks after the welfare of the people through both good and bad economic times.
Selena Ling is Head of Treasury Research and Strategy at OCBC Bank.